Archive

Rising producer prices eventually translate into higher consumer prices as businesses are forced to pass on a portion if not all of the price increments to their customers. So what you might be asking, this morning’s PPI indicated that producer prices fell -0.1% on a monthly basis. While this is true the PPI is broken out into three sub-components crude, intermediate, and finished goods—the headline PPI only tracks finished goods. As higher producer prices eventually pass-through to consumer prices; higher crude material costs ultimately impact intermediate good prices, while rising intermediate good prices in time increase the headline PPI. As of April crude material rose roughly 30% y/y, while intermediate good prices climbed 9%, the highest reading since 2008 (See chart). Core raw material prices rose 49.7% y/y–its largest yearly gain on record. While this isn’t an immediate recipe for higher consumer prices; it is definitely indicative that pressure is building in the pipeline.

Source: Bloomberg

In terms of monetary policy, short-term inflation expectations as measured by the US TIPS breakeven curve have diminished significantly on waning commodity prices and a stronger dollar stemming from the ongoing crisis in Europe and concerns over Chinese tightening. This will likely keep the Fed on hold through-out the remainder of the year as unemployment remains high and growth below what would be anticipated following a major recession. Looking further ahead, inflation pressure is gaining some momentum and should become more of a factor in monetary policy decisions as the year progresses.

There is no doubt that this week’s FOMC meeting will steal the economic headlines, however, the result is likely to be rather anticlimactic. I do not anticipate any major changes to the FOMC’s statement, and certainly no shift in the target rate—despite last month’s better than expected employment data. The Fed will not view a single data point as the start of a trend, and regardless of being on their minds the employment data will not have a significant impact at this meeting. After Wednesday we will inevitably be one meeting closer to an eventual rate hike, however, ahead of any hike the Fed would remove the phrase ‘extended period’ from the statement, and I do not yet believe that is in the cards.

Other important indicators this week include the producer price index, consumer price index, and industrial production. On the inflation front both headline producer and consumer prices will face some upward pressure due to higher energy and food prices, while the core releases should remain tame. Industrial production will face some headwinds from a relatively mild month reducing utility output, which should be more than offset by manufacturing output. An increase in aggregate manufacturing hours worked during the month help to support this belief.

During the week we will also hear earnings from FedEx (FDX), Best Buy (BBY), Nike (NKE), Oracle (ORCL), and Research in Motion (RIMM) to name a few. In other news, the Senate Banking Committee is expected to vote Thursday on the reconfirmation of Federal Reserve Chairman Bernanke. Boeing is also expected to conduct its first test flight of their new 787 Dreamliner, after numerous delays. Finally, President Obama will attend the UN Climate summit in Copenhagen to push for several environmental initiatives.

Here is the rest of this week’s US calendar:

Monday, Dec. 14

Nothing

Tuesday, Dec. 15

First day of the FOMC meeting

7:45 a.m. EST: ICSC-Goldman Store Sales (Risk: Neutral, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales. Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure. Last week’s number fell -1.3% compared to a drop of -0.1% a week prior.

8:30 a.m. EST: November’s Producer Price Index (Risk: Neutral, Market Reaction: Moderate): Rising food and energy prices during the month will likely place some upward momentum on the November’s PPI. However, increments in the core number should be only modestly positive after falling -0.6% in October. The current Bloomberg consensus forecast is for a monthly increment in headline PPI of 1.0%, compared to 0.2% for the core release.

8:30 a.m. EST: December’s Empire State Manufacturing Survey (Risk: Negative, Market Reaction: Moderate): Recent weakness in the manufacturing sector, combined with a declining new orders index could place additional downward pressure on the NY fed’s manufacturing survey for December after falling 11 points to 23.51 in November. Nevertheless, the current Bloomberg consensus forecast is anticipating a rise in the month to 25.0. As always it will be important to monitor the new orders-a forward looking component—, prices paid, and employment aspects of the survey.

8:55 a.m. EST: Redbook (Risk: Neutral, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales. This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales. According to the Redbook store sales rose 1.2% last week on a yearly basis.

9:00 a.m. EST: October’s Treasury International Capital (TIC) Data (Risk: Neutral, Market Reaction: Moderate): This report highlights the flow of financial instruments to and from the U.S. It indicates foreign demand for U.S. financial instruments and thus tends to have a stronger impact on the dollar and the bond markets than it does on equities. But, given the recent record levels for treasury auctions, it will be interesting to monitor foreign demand for US debt.

9:15 a.m. EST: Industrial Production (Risk: Neutral, Market Reaction: Significant): A significant increment in manufacturing hours worked during the month—a positive for industrial production—will be partially offset by an anticipated decline in utility output, stemming from relatively mild weather across the country. With this in mind the current Bloomberg consensus forecast is for a monthly increment in industrial production of 0.6%, versus 0.1% in October, with capacity utilization rising to 71.2% from 70.7%

1:00 p.m. EST: December’s Housing Market Index (Risk: Neutral, Market Reaction: Moderate): The NAHB Housing Survey, which measures home builder confidence, should continue to benefit from the extension/expansion of the first time home buyer tax credit. However, numerous headwinds still exist for the sector so any improvements in December are likely to be modest. The index was unchanged at 17 in November.

Wednesday, Dec. 16

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index. Applications rose 8.5% last week after rising 2.1% a week prior. Refinance applications climbed 11.1%, while purchase applications rose 4.0% on the back of attractive interest rates. A wave of buyers, filling out multiple mortgage applications, that were looking to take advantage of the first time home buyer tax credit–originally set to expire on Nov. 30th–have already completed their transactions, and have recently reduced the demand for mortgages. However, the recent extension of the first time home buyer tax credit should eventually bring a new set of buyers into the market, which could help support the purchase index over the coming months.

8:30 a.m. EST: November’s Consumer Price Index (Risk: Neutral, Market Reaction: Significant): As with the PPI, higher energy and food prices during the month will likely add some pressure on headline CPI, while core CPI should only show a modest rise. The current Bloomberg consensus forecast is for an increment of 0.4% for the headline number, and 0.1% for core. It may be important to note that headline CPI will likely experience its first year over year gain since February 2009.

8:30 a.m. EST: November’s Housing Starts (Risk: Neutral, Market Reaction: Moderate): Housing starts look to be up in November on the back of good weather, after falling more than anticipated in October. Additionally, construction jobs declined by only -27K during the month compared to -56K in October. The Bloomberg consensus forecast anticipates starts to rise to 575K, versus 529K in October; I anticipate that new building permits should also rise during the month after declining by -4.0% a month prior—permits tend to be a forward looking indicator toward starts.

10:30 a.m. EST: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories. Large unanticipated swings in this index could have a significant impact on energy prices. Last week this report showed a decline of -3.8 million barrels versus a jump of 2.1 million barrels a week prior.

2:15 p.m. EST: December’s FOMC Announcement (Risk: Neutral, Market Reaction: Very Significant): Despite being the week’s most eagerly anticipated piece of economic news, the outcome is likely to be somewhat anticlimactic. I do not anticipate any major changes compared to November’s FOMC statement, and certainly no shift in the target rate. The Fed will not view one month of better than anticipated employment data as a trend, and thus it is very unlikely to have a significant impact at this meeting, however, it will be on their minds. Nevertheless, we will be one meeting closer to an eventual rate hike, but I do not yet anticipate the removal of the key phrase ‘extended period’ from the FOMC’s statement. The Fed will likely reiterate that employment is still lagging and that “with substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time”.

Thursday, Dec. 17

8:30 a.m. EST: Third Quarter’s Current Account (Risk: Neutral, Market Reaction: Marginal): The third quarter current account deficit likely widened on the back of a wider trade deficit stemming from more expensive energy imports. The current account deficit totaled $99 billion in the second quarter.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims rose 17K last week to 474K, after falling 5K a week prior. Despite the decline in last week’s claim number the 4 week moving average improved to 473,750 from 481,500. Improving initial claims are indicative of fewer job losses in the monthly employment report; however, the job situation will get worse before it gets better. The current Bloomberg consensus forecast is expecting claims to come in at 465K, a decrease of -9K from last week.

10:00 a.m. EST: November’s Leading Indicators (Risk: Neutral, Market Reaction: Moderate): November’s leading indicator index will likely show its 8th consecutive month of positive readings. The current Bloomberg consensus forecast is expecting a +0.7% rise for the month, compared to a +0.3% increment in October. The biggest positive contributions for the index will likely come from the yield curve, initial jobless claims, and the average workweek, while the University of Michigan’s consumer expectations index should be the largest negative factor.

10:00 a.m. EST: December’s Philadelphia Fed Survey (Risk: Negative, Market Reaction: Moderate): As with the NY fed survey, recent weakness in the manufacturing sector will likely place some downward pressure on the Philly fed survey. The survey’s six month expectations index peaked at 60.1 in June and has since fallen to 36.8 in November—this tends to be an ominous sign for the spot reading. Nevertheless, the current Bloomberg consensus forecast is anticipating only a modest decline to 16.5 from 16.7 in November. However, the forecast range goes from a high of only 18.0 to a low of 6.9.

4:30 p.m. EST: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness. The market will pay close attention to the reserve bank credit component, which measures factors supplying providing reserves into the banking system. The Fed’s balance sheet shrank last week to US$2.169trn from US$2.186trn, primarily due to a reduction in long-term loans to banks. The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

The last full week in November brings with it its fair share of economic data, Fed talk, and a few important earnings stragglers. The general themes of the week will be housing, manufacturing, inflation, and the consumer. On the economic front, October’s retail sales—released on Monday—should steal the show, followed up by October’s industrial production data on Wednesday. Other important indicators include Monday’s empire state manufacturing survey and business inventories, Tuesday’s PPI and TIC data, Wednesday’s CPI and housing starts report, and finally Thursday’s jobless claims and leading economic indicators release. On the earnings front we can expect to hear from Home Depot, Lowes, Dell, GM, Gap, and Target. Bernanke will be providing the week’s most critical ‘Fed chatter’, with his speech to the Economic Club of New York on Monday, which some believe could have implications for the dollar.

Here is the rest of this week’s US calendar:

Monday, Nov. 16

8:30 a.m. EST: October’s Retail Sales (Risk: Neutral, Market Reaction: Significant):After dropping 1.5% in September, primarily due to the expiration of the ‘Cash for Clunkers’ program, retail sales should have experienced a modest jump in October, partially on the back of higher auto sales. Vehicle sales likely picked up during the month after falling 10.4% in September. The current Bloomberg consensus forecast for retail sales is an increment of 0.9%, while retail sales ex-autos is expected to rise 0.4%, after rising 0.5% in September.

8:30 a.m. EST: November’s Empire State Manufacturing Survey (Risk: Neutral, Market Reaction: Moderate): The New York Fed manufacturing index will likely experience a modest pullback after reaching a five year high in October. Nevertheless, the index should remain well above its breakeven point of 0. The current Bloomberg consensus forecast is for a reading of 29.0, versus 34.6 in October. As always I recommend paying close attention to the forward looking new orders index, along with the employment and prices paid index for hints toward the labor market and inflation story.

10:00 a.m. EST: September’s Business Inventories (Risk: Neutral, Market Reaction: Marginal):The rate at which businesses are reducing inventories is anticipated to decline in September, albeit remain negative. September will be the 14th consecutive month business inventories have decline. Inventories declined -1.5% in August, but should be down a more modest 0.8% in September. Auto inventories could be up slightly for the month as car dealers complete a limited restocking due to a jump in sales from the ‘Cash for Clunkers’ program

12:00 p.m. EST: Ben Bernanke, Fed Chairman, speaks to the Economic Club of New York

1:15 p.m. EST: Richard Fisher, Dallas Fed President, will discuss US economy and central bank at a community forum hosted by the District Bank in Dallas, TX

7:45 a.m. EST: ICSC-Goldman Store Sales (Risk: Neutral, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales. Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure. Last week’s number indicated a weekly decline of -0.1% in store sales compared to a gain of 0.1% a week prior—this was the first decline in six weeks.

8:30 a.m. EST: October’s Producer Price Index (Risk: Neutral, Market Reaction: Moderate):Rising food and energy prices during the month will likely lead to a significant increment in headline PPI. Factoring out these volatile components the core-PPI should experience a more modest gain of around +0.1%. The current Bloomberg consensus forecast for headline PPI is an increment of +0.5%, versus a decline of -0.6% a month prior.

8:55 a.m. EST: Redbook (Risk: Negative, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales. This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales. According to the Redbook store sales were rose 1.7% last week on a year over year basis.

9:00 a.m. EST: September’s Treasury International Capital (TIC) Data (Risk: Neutral, Market Reaction: Moderate):This report highlights the flow of financial instruments to and from the U.S. It indicates foreign demand for U.S. financial instruments and thus tends to have a stronger impact on the dollar and the bond markets than it does on equities. But, given the recent record levels for treasury auctions, it will be interesting to monitor foreign demand for US debt.

9:15 a.m. EST: October’s Industrial Production (Risk: Neutral, Market Reaction: Significant):After rising 0.7% in September, industrial production could face some pressure in October due to weakness in manufacturing, however, this weakness could be at least partially offset by utility output during the month. On the manufacturing side, the expiration of the ‘Cash for Clunkers’ program should continue to adversely impact auto manufacturing, while manufacturing hours worked during the month also fell. The current Bloomberg consensus is for an increment of +0.4%, compared to September’s growth of 0.7%.

1:00 p.m. EST: November’s Housing Market Index (Risk: Neutral, Market Reaction: Marginal):The extension of the first time home buyer tax credit should help bolster the NAHB/Wells Fargo housing market index, which fell to 18 in October. This release could also provide a good lead in for the housing starts and permit data being released a day after.

7:00 a.m. EST: MBA Mortgage Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index. Applications rose last week 3.2% after gaining 8.2% a week prior. Last week’s overall increment was due entirely to a jump in refinance applications, which rose 11.3%, while the purchase index fell 11.7%. A wave of buyers, filling out multiple mortgage applications, that were looking to take advantage of the first time home buyer tax credit–originally set to expire on Nov. 30th–have already completed their transactions, thereby reducing the current demand for mortgages. However, the recent extension of the first time home buyer tax credit should eventually bring a new set of buyers into the market, which could help support the purchase index over the coming months–don’t forget buying a house can be a long drawn out process. Nevertheless, increased lending standards for FHA loans, due to the organizations worsening finances, could place some headwinds on the purchase index’s recovery.

8:30 a.m. EST: October’s Consumer Price Index (Risk: Neutral, Market Reaction: Significant):Consumer prices in October likely experienced a modest rise on the back of higher food and energy prices, after rising 0.2% in September. Core-CPI should remain relatively tame, with increasing auto prices potentially placing some upward pressure on the index. Interestingly, residential rent and owners’ equivalent rent both declined by -0.1% in September—according to the BLS this is only the second time a decline of this magnitude has occurred. The current Bloomberg consensus forecast is for an increase of 0.2% in the headline number and 0.1% for the core.

8:30 a.m. EST: October’s Housing Starts (Risk: Neutral, Market Reaction: Moderate):Housing starts and permits should continue to gain some momentum as the inventory of homes for sales continues to moderate. It will be important to monitor multi-family housing starts, which has been a volatile component compared to single family starts—single family starts have been positive for every month since March, excluding August. The current Bloomberg consensus forecast is for an increase in starts to 600K from 590K a month prior.

9:15 a.m. EST: James Bullard, St. Louis Federal Reserve Bank President, will discuss the US economic outlook at the Commerce Bank Economic Breakfast in Clayton, MO.

10:30 a.m. EST: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories. Large unanticipated swings in this index could have a significant impact on energy prices. Last week this report showed a gain of -1.8 million barrels versus a decline of -4.0 million barrels a week prior.

Thursday, Nov. 19

Charles Plosser, Philadelphia Federal Reserve Bank President, will be speaking at the Global Interdependence Center conference on food and water in Singapore.

8:30 a.m. EST: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell last week by 12K to 502K, after falling 20K a week prior. I should note there is a potential for initial jobless claims slip below 500K this week, which would assuredly invoke numerous headlines. Nevertheless, despite second derivative improvements these levels still indicate continued losses for monthly payrolls—albeit at a slower pace—coupled further deterioration to the unemployment rate, which has already exceeded 10%. The current Bloomberg consensus forecast is expecting claims to come in at 505K, essentially unchanged from last week.

10:00 a.m. EST: October’s Leading Indicators (Risk: Neutral, Market Reaction: Moderate):October’s leading indicator index will likely show its seventh consecutive month of positive readings. The current Bloomberg consensus forecast is expecting a +0.4% rise for the month, compared to a +1.0% increment in September. The biggest positive contributions for the index will likely come from the yield curve, initial jobless claims, and stock prices, while the University of Michigan’s consumer expectations index should be the largest negative factor.

10:00 a.m. EST: November’s Philadelphia Fed Survey (Risk: Negative, Market Reaction: Moderate):Recent weakness in the Philly Fed’s expectations index may catch up with the current conditions index potentially placing some pressure on November’s headline number. Nevertheless, the current Bloomberg consensus forecast is for a reading of 12.0 compared to 11.5 in October.

September Housing Starts finished the month at an annual rate of 590K (+0.5%). At the same time, August Housing Starts were revised down to 587K versus its original release of 598K. Housing permits declined by -1.2%, to 573K. Unlike starts, August permits experienced a modest upward revision to 580K from 579K. Single-family starts rose +3.9%, while multi-family units dropped -15.2%. September’s gains were essentially a wash when you factor in August’s revisions. On a regional basis, in the South starts rose +7.1%-a record gain– while they fell -8.8% in the West, -5.5% in the Northeast, and -1.8% in the Midwest.

September Producer Price Index (PPI) fell -0.6%, after rising +1.7% in August. The Core PPI, which excludes food and energy, fell -0.1% in September following +0.2% increment in August. The decline in the headline number was not unexpected given a pullback in energy prices for the month. For the moment, the risk of deflation continues to outweigh the risk for immediate inflation. However, the likely path is that core prices will remain stagnant until the economic recovery gains more traction and inflationary pressures once again take hold.

August’s Retail Sales rose 2.7%, compared to a consensus forecast of +2.0% and a previous reading in July of -0.1%. The ex-autos component of retail sales came in at 1.1%, versus a consensus forecast of +0.4% and a previous reading of -0.6% in July. Therefore, what is typically a bump in sales due to better than anticipated back-to-school spending has been replaced to some extent by the temporaneous effects of the US government’s Cash for Clunkers program and higher gasoline prices. Ex-autos and ex-gas us retail sales increased a more modest +0.6%. Weakened consumer confidence stemming from a deteriorating labor market–albeit at a slower pace–coupled with consumers hesitations toward borrowing and banks unwillingness to lend should keep retail sales suppressed for some time. However, modestly upbeat performance excluding autos and gas could be the beginning of longer-term improvements, and should be monitored closely.

September’s Empire State Manufacturing Survey came in at 18.9 compared to 12.1 in August, and a Bloomberg consensus forecast of 14.0. This is the index’s second month in a row to finish in positive territory. This is the highest reading for the index since Nov. 2007. Look at the details, new orders rose to +19.84 from +13.43 in August, prices paid jumped to +20.24 from +13.83, and the 6-month outlook index finished at +52.29 from +48.22. Positive performance in the news orders index should help to sustain upward momentum in future releases. There was however some weakness in the shipments index, which fell to 5.3 from 14.1 in August.

August’s PPI rose by +1.7%, versus a consensus forecast of +0.8%, while the Core-PPI rose by +0.2%, compared to a consensus forecast of +0.1%

Overall markets are reacting positively to the news with equities showing some gains in pre-market trading, and treasuries falling on the back of the pricing and sales news.

After last week’s relatively light economic calendar, the market faces a deluge of data from nearly every facet of the economy. With that said this week’s most closely watched release will likely be Tuesday’s retail sales announcement, which is expected to show a +2.0% gain on the back of increased auto-sales and higher gas prices, but not on what would traditionally be back-to-school spending. Other notable releases include Tuesday’s PPI & Empire State Manufacturing Survey, Wednesday’s CPI & Industrial Production data, and Thursday’s Housing Starts, Jobless Claims, and Philly Fed Survey releases. The week concludes with a quadruple witching on Friday, which has the potential to bring unusual volatility and volumes to the market.

Over the next several months, the incremental improvements in the US housing market could begin to come under some pressure as the US government’s first time home buyer tax incentive program is set to expire on November 30th. This deadline doesn’t leave new buyers much time to find and close on any new purchases, which should lead to a gradual unwinding of the program. The first evidence of this could be seen in this month’s housing starts data, given the long lag between getting homes permitted and sold to buyers in time to qualify for the program. This combined with the temporaneous effect of the government’s now expired ‘Cash for Clunkers’ could help catalyze a retrenchment, or at least place adverse pressure on the housing and manufacturing sectors amid a still weakening labor market.

Here is the rest of this week’s calendar:

Monday September 14th:

8:35AM: Fed Governor Elizabeth Duke speaks at an annual conference for CPA’s in Washington D.C. on “Regulatory Perspectives on the Changing Accounting Landscape”.

3:50PM: San Francisco Fed President Janet Yellen will discuss the US economic outlook to CFA analysts in San Francisco.

Tuesday September 15th:

7:45AM: ICSC-Goldman Store Sales (Risk: Downward, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales. Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure. Last week’s number indicated a rise of 0.6% in store sales compared to an decline of -0.5% a week prior.

8:30AM: Producer Price Index (Risk: Neutral, Market Reaction: Significant): Rising energy prices from July to August will place upward pressure on August’s headline PPI number, while the core-PPI should remain largely unchanged. The current Bloomberg consensus forecast is for a rise of +0.8% in the PPI, and +0.1% for the core number.

8:30AM: Retail Sales (Risk: Neutral, Market Reaction: Significant): What is typically a jump in August retail sales driven by increased back-to-school purchases will likely not materialize. However, the index should experience relatively robust gains through a combination of mostly higher auto sales, due to the government’s ‘Cash for Clunkers’ program, and to some degree the pricing effect of rising gasoline prices. The current Bloomberg consensus forecast is for an increment in retail sales of +2.0%, while retails sales ex-autos are anticipated to come in at +0.4%.

8:30AM: Empire State Manufacturing Survey (Risk: Neutral, Market Reaction: Moderate): The NY State Manufacturing Index should remain in positive territory in September, after its first positive reading in over a year last month. This theory is supported by last month’s large increase in the survey’s new order index, which rose to 13.4 from 5.9 a month prior. It will be important to monitor August’s new order index, which should remain positive, but may face some downward pressure due to strong seasonal adjustment factors. The current Bloomberg consensus forecast is for a September reading of 14.0, versus an August reading 12.1.

8:55AM: Redbook (Risk: Negative, Market Reaction: Marginal): The Redbook is a weekly measurement of chain stores, discounters, and department store sales. This indicator tends to be less significant than the ICSC-Goldman Store Sales in forecasting retail sales. According to the Redbook store sales were down -2.4% last week on a year over year basis.

10:00AM: Business Inventories (Risk: Neutral, Market Reaction: Marginal): The current Bloomberg forecast is for a -0.9% decline in July’s business inventories. If this release is indeed negative it will be the 12th consecutive month inventories have declined. But, over the past several months, the inventory to sales ratio has been receding from its January 2009 high.

10:00AM: Chairman Ben Bernanke will deliver the same speech he gave at the Jackson Hole Symposium to the Brookings Institute, but Q&A is anticipated.

Wednesday September 16th:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index. Last week the overall index resumed its upward trend, rising 17.0%. The refinance index rose 22.5%, while the purchase index climbed 9.5%; these increments were primarily driven by falling mortgage rates and relatively low home prices.

8:30AM: Consumer Price Index (Risk: Neutral, Market Reaction: Significant): As with the PPI, August’s CPI release could face some upward pressure due to increases in fuel prices over the month; the Bloomberg consensus forecast is presently anticipating a +0.4% increment in the headline number. At the core level, consumer prices should remain relatively steady with the current Bloomberg consensus forecast calling for an increment of just +0.1%. Other factors that could impact this month’s release include upward pressure from increasing auto and tobacco prices.

8:30AM: Current Account (Risk: Neutral, Market Reaction: Marginal): The 2Q09 current account deficit will likely fall to its lowest levels in several years, on the back of declining energy import prices during the quarter. During 1Q09 the deficit stood at -US$102.7bn.

9:00AM: Treasury International Capital (TIC) Data (Risk: Neutral, Market Reaction: Marginal): This report highlights the flow of financial instruments to and from the U.S. It indicates foreign demand for U.S. financial instruments and thus tends to have a stronger impact on the dollar and the bond markets than it does on equities. But, given the recent record levels for treasury auctions, it will be interesting to monitor foreign demand for US debt.

9:15AM: Industrial Production (Risk: Downside, Market Reaction: Significant): The current Bloomberg consensus forecast is for August’s industrial production to show an increase of +0.7%, compared to July’s increment of +0.5%. A large portion of August’s increment is anticipated to come from increased auto production, which in my opinion, however, could be more than offset by weakness in other areas of manufacturing due to a reduction in hours worked for employees in the sector during the month. The Bloomberg consensus forecast anticipates that capacity utilization will move to 69.0% in August from 68.5% a month prior.

10:30AM: EIA Petroleum Status Report (Risk: Neutral, Market Reaction: Moderate): This report measures US domestic petroleum inventories. Large unanticipated swings in this index could have a significant impact on energy prices. Last week this report showed a decline of -5.9mn barrels versus a decline of -0.4mn barrels a week prior.

1:00PM: Housing Market Index (Risk: Neutral, Market Reaction: Marginal): The NAHB/Wells Fargo Housing Market Index is expected to show a modest gain on the back of tax credits, attractive mortgage rates, and low home prices. The current Bloomberg consensus forecast is for a reading of 19 in September, compared to the previous month’s result of 18. This index measures builders’ views over the conditions of the housing market; any reading below 50 implies their view is negative. The index remains depressed primarily due to, improving, but still enormous inventory levels.

Thursday September 17th:

8:30AM: Housing Starts (Risk: Downside, Market Reaction: Moderate): Increased single-family starts will likely place upward momentum on the overall index with the Bloomberg consensus forecast presently anticipating a rise to 0.600mn units in August from 0.581mn units a month prior. But, going forward there are some downside risks to this data due to the expiration of the government’s first time home buyer tax rebate in November. What this means is that according to the NAHB, “July was probably the last month in which to get homes permitted and started in time for customers to take advantage of the incentive.”

8:30AM: Jobless Claims (Risk: Neutral, Market Reaction: Significant): Initial claims fell last week by 20K to 550K. Claims should demonstrate marginal improvements over the coming months as weakness in the labor market slowly abates. But, make no mistake about it these levels are still uncomfortably high, and will continue to adversely impact the US payroll data for some time. The current Bloomberg consensus for this week’s initial claims number is 575K. This week’s projected increment is partially due to the positioning of this year’s Labor Day Holiday. In fact using a simple regression analysis claims at their current levels would indicate a decline in payrolls of roughly 500K, however, recently this model has been exaggerating the actual effect on payrolls, but nevertheless is a cause for concern going forward.

10:00AM: Philadelphia Fed Survey (Risk: Neutral, Market Reaction: Moderate): The Philly Fed Index should continue last month gains with the current Bloomberg consensus survey indicating a reading of 8.0 for September compared to 4.2 in August. This anticipated increment is on the back of the new order index’s strong performance in August moving to +4.2 from -2.2. Given recent momentum the new orders index should also experience an additional rise this month.

4:30PM: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness. The market will pay close attention to the reserve bank credit component, which measures factors supplying providing reserves into the banking system. Last week the Fed’s balance sheet rose again to US$2.072trn from US$2.069trn a week prior. The fed’s balance sheet has slowly been shifting away from emergency lending facilities to Treasuries, agency debt, and mortgage-backed securities to help moderate long-term interest rates.

Friday September 18th:

Quadruple Witching: Contracts for stock index futures, stock index options, stock options and single stock futures (SSF) all expire today. As a result, we could see an increased amount of volumes and volatility in the market, especially toward the end of the day.

Housing starts fell to 0.581 in July compared to 0.587mn. This number was slightly below the market consensus. The 1% drop in starts comes after a 10% increase in July. Single family starts actually rose 1.7%, but this was more than offset by a 13% decline in multi-family starts. Starts fell 16% in the Northeast, 2% in the West and 1% in the South, while increasing 13% in the Midwest. Despite starts being on an uptrend, over the past couple months, it is important to remember that this index remains well below its historical average and is indicative of a weak housing market. Nevertheless, most indicators continue pointing towards a bottom in the housing market, including yesterday’s home builder’s index. Foreclosures, high inventories, and a weak labor market continue to act as the sector’s Achilles heel.

PPI fell more than anticipated in July at -0.9% on the back of lower energy prices combined with an a unexpected drop in food prices. Core-PPI fell -0.1%. The drop in Core-PPI was well rounded across many goods. On a year over year basis headline PPI has fallen a record 6.8%, while Core-PPI is up 2.6%.

Despite a rather hectic week of economic releases; earnings news will likely steal the show this week.Big names on the earnings calendar this week include Goldman Sachs, JPMorgan, Bank of America, Citigroup, GE, Intel, Google, IBM, and Johnson & Johnson. However, a recent mixture of good and bad economic news, including decreasing consumer sentiment, rising unemployment, and dreadful retail sales have raised concerns over the potential for a prolonged recession.Therefore, it’s important we pay close attention to Tuesday’s retail sales and PPI data, Wednesday’s CPI and industrial production data, and finally Thursday’s jobless claims number, all of which have the potential to move the market in one direction or another.Here is the remainder of the calendar:

Monday July 13th:

2:00PM: Treasury Budget (Risk: Upside, Market Reaction: Marginal): The current Bloomberg consensus for the Treasury’s monthly budget report is –US$97bn compared to –USD187.7bn a month prior.These large deficits have been fueled by TARP expenditures and buying federal housing agency debt. But, several companies have recently paid back TARP funds, which will likely reduce the level of this month’s deficit.

Tuesday July 14th:

7:45AM: ICSC-Goldman Store Sales (Risk: Downside, Market Reaction: Marginal): This weekly index tracks aggregate store sales across major US retailers, accounting for roughly 10% of total retail sales.Given recent data supporting an increasing US saving rates and a worsening employment situation, this index could face some downward pressure.Last week’s number indicated a 0.1% increment in store sales over the previous week.

8:30AM: Producer Price Index (Risk: Downside, Market Reaction: Moderate/Significant): Higher energy prices and a small increment in food prices will likely lead to a higher headline number for the PPI, while core-PPI should remain relatively unchanged. According to Bloomberg the current consensus forecast for the PPI and core-PPI is 0.8% and 0.1%, respectively.Any significant upward surprise in this index could amplify rhetoric among inflation hawks.This index is considered a forward looking indicator to profits and the CPI.

8:30AM: Retail Sales (Risk: Neutral, Market Reaction: Significant): The effect of higher gasoline prices in June could cause retail sales to surprise to the upside. But, factoring out gas, recent weakness in other sales indicators imply that June’s sales data will be flat to negative.According to Bloomberg the current market consensus for retail sales and retail sales-ex autos is 0.5% and 0.6%, respectively.Retail sales plunged at the end of last year and have essentially remained flat this year.

10:00AM: Business Inventories (Risk: Neutral, Market Reaction: Marginal): On the back of a decline in wholesale inventories, business inventories will likely decline again in June after declining the previous eight months.Look for auto and retail inventories to continue their decline.According to Bloomberg the current market consensus for business inventories is a monthly change of -0.8%.The good news is that with inventory levels so low once a recovery does begin we could see a jump in manufacturing as companies look to replenish their stocks.

Wednesday July 15th:

7:00AM: MBA Purchase Applications (Risk: Neutral, Market Reaction: Marginal): This index, which tracks new mortgage applications tends to be a reasonable forward looking indicator for home sales, but issues including customers filling out numerous applications could skew the index.Last week the purchase index rose 6.7%, while the refinance index increased by 15.2% on the back of relatively low mortgage rates.

8:30AM: Consumer Price Index–CPI (Risk: Downside, Market Reaction: Significant): As with the PPI, a recent rise in energy prices will likely add some upward pressure on the headline index, while core CPI should remain relatively constant relative to last month.According to Bloomberg the current consensus forecast for the CPI and core-CPI is 0.7% and 0.1%, respectively.Any significant upward surprise in this index could amplify rhetoric among inflation hawks; the inverse is true with a downward surprise.

8:30AM: Empire State Manufacturing Survey (Risk: Downside, Market Reaction: Marginal): This index tracks manufacturing activity in New York state across 175 different companies in a variety of industries.Recent weakness in the overall manufacturing sector will likely add some downside pressure to July’s release.According to Bloomberg, the current market consensus for the general business conditions index is -4.5, compared to -9.4 a month prior.It will be important to monitor the general business conditions, new orders, and prices paid components of the index, all of which were negative last month.Conversely, the future general business conditions index rose last month.

9:15AM: Industrial Production (Risk: Downside, Market Reaction: Significant): Continued weakness in manufacturing sector will likely add downward pressure to the overall index.According to Bloomberg, the current market consensus for June’s IP is a monthly change of -0.7% with a capacity utilization rate of 67.8%.In June capacity utilization stood at 68.3%, or 12.6% below its 1972-2008 average.

2:00PM: FOMC Minutes (Risk: Neutral, Market Reaction: Marginal): Given the three week lag between the FOMC meeting and the release of the minutes this should have only a marginal effect on trading.But, the minutes could elaborate the rationale behind the FOMC’s decision, and give some clues to future decisions, in which case the market could move on the release.

Thursday July 16th:

8:30AM: Jobless Claims (Risk: Upside, Market Reaction: Significant):Last week’s better than expected initial jobless claims may have been exaggerated by inaccurate seasonal adjustment factors stemming from the timing of automotive and other manufacturing lay-offs, which could be repeated this week.According to Bloomberg the current consensus for initial jobless claims stand at 535K, compared to 565K last week.Although, I do believe we will continue to see a downward trend in the number of new claims, the level last week’s number implied is too optimistic.

9:00AM: Treasury International Capital Data (Risk: Neutral, Market Reaction: Marginal): This data highlights the flow of financial instruments to and from the US.Thus, indicating foreign demand for US financial instruments, which tends to have a stronger impact on the dollar and bond markets compared to equities.

10:00AM: Philly Fed Survey (Risk: Downside, Market Reaction: Moderate): This index, which tracks manufacturing activity within the Philly Fed’s district, is correlated to both the ISM and Industrial production indices.According to Bloomberg the current market consensus for the general business conditions index is -5.0 versus -2.2 a month prior.Continued weakness in manufacturing will likely place downward pressure on this index.

1:00PM: Housing Market Index (Risk: Downside, Market Reaction: Moderate): The housing market index, published by the National Association of Home Builders, indicates the demand for housing combined with consumer sentiment towards the housing market.The index is calculated by using a weighted average of the following indices; present sales of new homes, sale of new homes expected in the next six months, and traffic of prospective buyers in new homes. Increasing unemployment coupled with waning consumer confidence could place some downward pressure on this index.

4:30PM: Fed Balance Sheet & Money Supply (Risk: Neutral, Market Reaction: Marginal): Since the Fed’s shift to quantitative easing, the balance sheet has become one method to measure to the Fed’s effectiveness.The market will pay close attention to the reserve bank credit component, which measures factors supplying providing reserves into the banking system.Last week the Fed’s balance sheet shrunk to $1.977 trillion from $1.989 trillion the previous week.

Friday July 17th:

8:30AM: Housing Starts (Risk: Downside, Market Reaction: Marginal/Moderate): After experiencing an unexpected bump in May housing starts are likely to decline in June.According to Bloomberg the current market consensus for starts is 530K, compared to 532K last month.Weak demand for homes will likely place downward pressure on this index.

Contact Me:

Michael.McDonough@fiateconomics.com
Michael is an economist/strategist who has worked from Wall Street to Hong Kong primarily focusing on the U.S. and emerging markets. He has also written several columns. More

Twitter Feed...

Do TSA agents and prison guards go through the same training course? 2010-11-13

Bloomberg: "*IRISH FINANCE MINISTRY SAYS THERE ARE NO TALKS ON EU AID" 2010-11-12